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Stability or survival? The truth behind economic optimism
Celebrating the 'success' of IMF discussions, the Prime Minister of Pakistan, has tried to paint an optimistic picture of economy. He claimed it as a return to stability and promised to shift from austerity to growth. However, in reality, these assertions seem to ignore the complex reality.
In May 2025, Executive Board of IMF completed the first review of Pakistan's Extended Fund Facility (EFF), allowing the disbursement of roughly $1 billion, and simultaneously approved a new $1.4 billion to support climate resilience under Resilience and Sustainability Facility (RSF).
It must be kept in mind that these approvals came with stringent conditions. Although, IMF staff noted that discussions on the FY2026 budget and reform agenda were 'constructive', but in parallel government has clashed repeatedly with the Fund over budget targets. The national budget presentation was postponed as authorities haggled with the IMF over tax relief and subsidy levels.
Budget 2025-26: Pakistan govt offers tax relief to salaried class, but representatives unhappy
Ultimately, the IMF imposed caps on subsidies and demanded stricter fiscal targets, reportedly adding eleven new conditions to the program (including passing an agricultural income tax and publishing a governance action plan by June 2025) before the next tranche can be released.
In short, 'success' in government's rhetoric must be testified. Continued IMF engagement definitely helps sustain Pakistan's critical financing, but it always comes at the cost of severely compromised autonomy and the need to implement a demanding reform package.
On the macroeconomic front, there are genuine signs of stabilization. For instance, inflation has fallen dramatically (headline inflation hit a historic low of 0.3 percent in April 2025), and the economy posted a primary fiscal surplus of about 2.0 percent of GDP during the first half of FY2025. Foreign exchange reserves have recovered (rising to roughly $10.3 billion by end-April 2025) and are projected to grow toward $13.9 billion by June.
The World Bank notes that Pakistan's economy 'continues to stabilize', and credit-rating agencies have begun to reflect these gains (Fitch in April 2025 upgraded Pakistan's issuer rating from CCC+ to B–. In interviews Pakistani officials argue that IMF support has been secured on 'merit' and that key financial balances are improving.
Yet this stabilization is fragile and incomplete. Growth remains lower as recently released Economic Survey (2024-25) expressed confidence in achieving 2.7% GDP growth for FY2024-25, though current quarterly figures suggest the economy must grow by 5.5% in the April–June quarter to meet that target.
Sindh budget for FY2025-26 at a glance
Similarly, international forecasts also remain on the lower side (the World Bank projects roughly 2.7 percent growth for FY2025 rising to 3.1 percent in FY2026; the Asian Development Bank forecasts 2.5–3.0 percent).
Debt levels loom large: external debt service alone is on the order of Rs 9.8 trillion for FY2026, and Pakistan remains highly vulnerable to shocks.
The World Bank explicitly warns that despite recent improvements, the 'outlook remains fragile' and growth will likely stay low as tight fiscal and monetary policies rebuild buffers.
Importantly, the claimed shift toward development seems mostly aspirational. Because, in the draft budget the Public Sector Development Programme (PSDP)–the government's development spending fund–has been slashed drastically (proposed at ~Rs 1 trillion for FY26, far below the ~Rs 3 trillion level ministries had sought, and down from Rs 1.4 trillion even a year earlier).
Such cuts were driven by the imperative to meet IMF-agreed fiscal targets, but they seem to weaken the narrative of an investment-led recovery.
Essentially, Pakistan's macroeconomic 'stabilization' (like lower inflation, higher reserves and a contained deficit) is real but nascent and has required austerity and spending restraint. As the IMF notes, this makes the recovery vulnerable unless counterbalanced by sustained reforms and growth-enhancing.
Beyond headline figures, structural problems still exist. The government has repeatedly pledged broad institutional reforms and insisted it is modernizing tax and state enterprises. For example, the Prime Minister has ordered digitization of revenue collection and third-party audits of the Federal Board of Revenue reforms.
The IMF-supported programs indeed list many reforms, such as, broadening the tax base (particularly to the large, traditionally exempt agricultural and real estate sectors), overhauling loss-making State-Owned Enterprises (SOEs), restructuring the energy sector, and decisively strengthening governance and anti-corruption frameworks.
Both the World Bank and ADB echo that durable growth requires 'profound structural reforms' particularly in taxation, the business environment, and public-sector efficiency.
However, history suggests these will be difficult. Analysts note that Pakistan's civil service and SOEs have long been politicized, and past reform attempts have failed due to the lack of strong political will to overcome vested interests. The IMF explicitly warned that delaying reforms could 'dampen the nascent recovery'.
In short, the government's reform agenda is comprehensive on paper, but the actual test will be whether these measures go beyond technical fixes. For instance, computerizing tax collection alone will not raise revenues if enforcement remains weak or the huge shadow economy (recently estimated at over $500 billion) continues to evade the tax net.
Fiscal policy also remains an acute challenge. Pakistan's budget process has been marked by contention. Officials claim to balance fiscal consolidation with protecting social outlays, but progress has been hard-won.
The IMF's own review notes that government was seeking new tax relief measures ahead of the budget, prompting the Fund to insist on an overall cap on subsidies and agree only to limited changes to announced figures.
Defence spending is especially sensitive: Pakistan allocates roughly 18% of its budget to defence, and while the IMF does not formally set those allocations, it has examined them closely and reportedly accepted necessary increases only on condition that fiscal targets are met.
Such trade-offs underscore the tightrope: to meet IMF targets the government has accepted sharp cuts in capital projects.
As Planning officials warned, cutting the PSDP so deeply risks choking off growth and undermining long-term priorities. Meanwhile, the State Bank cautions that meeting even the planned primary surplus will be 'challenging'.
International experts emphasize the need to widen the revenue base rather than rely solely on spending cuts; indeed, the IMF and World Bank both urge accelerating tax reforms and reducing inefficiencies (for example, improving SOE performance) to make room for growth-oriented investment.
So far, however, such measures remain plans rather than tangible gains, and fiscal adjustment continues to weigh on the economy.
In conclusion, the Prime Minister's optimistic narrative finds some grounding in recent data–there has been measurable progress in halting hyperinflation, rebuilding reserves, and securing IMF lifelines–but these gains are fragile and heavily conditional.
Pakistan's future pivots not upon rhetoric, but on credible actions, such as, fully implementing IMF-mandated reforms, realistically addressing the fiscal crunch, and genuinely strengthening transparency in government.
Only by meeting these challenges uncompromisingly and communicating honestly about them, Pakistan can hope to translate short-term stabilization into long-term, and sustainable growth.
The article does not necessarily reflect the opinion of Business Recorder or its owners
